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Ignorance Is Not Bliss

Tyler Durden's picture




 

Submitted by Ben Hunt via Salient Partners' Epsilon Theory blog,

This is the concluding Epsilon Theory note of a trilogy on coping with the Golden Age of the Central Banker, where a policy-driven bull market has combined with a machine-driven market structure to play you false.

The first installment – “One MILLION Dollars” – took a trader’s perspective.

 

The second – “Rounders” – was geared for investors.

 

Today’s note digs into the dynamics of the machine-driven market structure, which gets far less attention than Fed monetary policy but is no less important, to identify what I think is an unrecognized structural risk facing both traders and investors here in the Brave New World of modern markets.

To understand that risk, we have to wrestle with the investment strategies that few of us see but all of us feel … strategies that traffic in the invisible threads of the market, like volatility and correlation and other derivative dimensions. A few weeks ago (“Season of the Glitch”) I wrote that “If you don’t already understand what, say, a gamma hedge is, then you have ZERO chance of successfully trading your portfolio in reaction to the daily ‘news’.” Actually, the problem is worse than that. Just as dark matter (which as the name implies can’t be seen with visible light or any other electromagnetic radiation, but is perceived only through its gravitational effects) makes up some enormous portion of the universe, so do “dark strategies”, invisible to the vast majority of investors, make up some enormous portion of modern markets. Perceiving these dark strategies isn’t just a nice-to-have ability for short-term or tactical portfolio adjustments, it’s a must-have perspective for understanding the basic structure of markets today. Regardless of what the Fed does or doesn’t do, regardless of how, when, or if a “lift-off” in rates occurs, answering questions like “does active portfolio management work today?” or “is now a good time or a bad time for discretionary portfolio managers?” is impossible if you ignore derivative market dimensions and the vast sums of capital that flow along these dimensions.

How vast? No one knows for sure. Like dark matter in astrophysics, we “see” these dark strategies primarily through their gravitational pull on obviously visible securities like stocks and bonds and their more commonly visible dimensions like price and volume. But three massive structural shifts over the past decade – the concentration of investable capital within mega-allocators, the development of powerful machine intelligences, and the explosion in derivative trading activity – provide enough circumstantial evidence to convince me that well more than half of daily trading activity in global capital markets originates within derivative dimension strategies, and that a significant percentage (if you held a gun to my head I’d say 10%) of global capital allocated to public markets finds its way into these strategies.

Let me stick with that last structural change – the explosive growth in derivative trading activity – as it provides the best connection to a specific dark strategy that we can use as a “teachable moment” in how these invisible market dimensions exert such a powerful force over every portfolio, like it or not. The chart below, courtesy of Nanex’s Eric Scott Hunsader, shows the daily volume of US equity and index option quotes (not trades, but quotes) since mid-2003. The red dots are daily observations and the blue line is a moving average. In 2004 we would consistently see 100,000 options quotes posted on US exchanges on any given day. In 2015 we can see as many as 18 billion quotes in a single day. Now obviously this options activity isn’t being generated by humans. There aren’t millions of fundamental analysts saying, “Gee, I think there’s an interesting catalyst for company XYZ that might happen in the next 30 days. Think I’ll buy myself a Dec. call option and see what happens.” These are machine-generated quotes from machine-driven strategies, almost all of which see the world on the human-invisible wavelength of volatility rather than the human-visible wavelength of price.
 


 

There’s one and only one reason why machine-driven options strategies have exploded in popularity over the past decade: they work. They satisfy the portfolio preference functions of mega-allocators with trillions of dollars in capital, and those allocators in turn pay lots of money to the quant managers and market makers who deliver the goods. But volatility, like love if you believe The Four Aces, is a many splendored thing. That is, there’s no single meaning that humans ascribe to the concept of volatility, so not only is the direct relationship between volatility and price variable, but so is the function that describes that relationship. The definition of gamma hasn’t changed, but its meaning has. And that’s a threat, both to guys who have been trading options for 20 years and to guys who wouldn’t know a straddle from a hole in the head.

Okay, Ben, you lost me. English, please?

The basic price relationship between a stock and its option is called delta. If the stock moves up in price by $2.00 and the option moves up in price by $1.00, then we say that the option has a delta of 0.5. All else being equal, the more in-the-money the option’s strike price, the higher the delta, and vice versa for out-of-the-money options. But that delta measurement only exists for a single point in time. As soon as the underlying stock price change is translated into an option price change via delta, a new delta needs to be calculated for any subsequent underlying stock price change. That change in delta – the delta of delta, if you will – is defined as gamma.

One basic options trading strategy is to be long gamma in order to delta hedge a market neutral portfolio. Let’s say you own 100 shares of the S&P 500 ETF, and let’s assume that an at-the-money put has a delta of 0.5 (pretty common for at-the-money options). So you could buy two at-the-money put contracts (each contract controlling 100 shares) to balance out your 100 share long position. At this point you are neutral on your overall market price exposure; so if the S&P 500 goes up by $1 your ETF is +$100 in value, but your puts are -$100, resulting in no profit and no loss. But the delta of your puts declined as your S&P ETF went up in price (the options are now slightly out-of-the-money), which means that you are no longer market neutral in your portfolio but are slightly long. To bring the portfolio back into a market neutral position you need to sell some of your ETF. Now let’s say that the S&P goes down by $2. You’ve rebalanced the portfolio to be market neutral, so you don't lose any money on this market decline, but now the delta of your puts has gone up, so you need to buy some S&P ETF to bring it back into market neutral condition. Here’s the point: as the market goes back and forth, oscillating around that starting point, you are constantly buying the ETF low and selling it high without taking on market risk, pocketing cash all the way along.

There are a thousand variations on this basic delta hedging strategy, but what most of them have in common is that they eliminate the market risk that most of us live with on a daily basis in favor of isolating an invisible thread like gamma. It feels like free money while it works, which attracts a lot of smart guys (and even smarter machines) into the fray. And it can work for a long time, particularly so long as the majority of market participants and their capital are looking at the big hazy market rather than a thread that only you and your fellow cognoscenti can “see”.

But what we’re experiencing in these dark strategies today is the same structural evolution we saw in commodity market trading 20 or 30 years ago. In the beginning you have traders working their little delta hedging strategies and skinning dimes day after day. It’s a good life for the traders plucking their invisible thread, it’s their sole focus, and the peak rate of return from the strategy comes in this period. As more and larger participants get involved – first little hedge funds, then big multistrat hedge funds, then allocators directly – the preference function shifts from maximizing the rate of return in this solo pursuit and playing the Kelly criterion edge/odds game (read “Fortune’s Formula” by William Poundstone if you don’t know what this means) in favor of incorporating derivative dimension strategies as non-correlated return streams to achieve an overall portfolio target rate of return while hewing to a targeted volatility path. This is a VERY different animal than return growth rate maximization. To make matters even muddier, the natural masters of this turf – the bank prop desks – have been regulated out of existence.

It’s like poker in Las Vegas today versus poker in Las Vegas 20 years ago. The rules and the cards and the in-game behaviors haven’t changed a bit, but the players and the institutions are totally different, both in quantity and (more importantly) what they’re trying to get out of the game. Everyone involved in Las Vegas poker today – from the casinos to the pros to the whales to the dentist in town for a weekend convention – is playing a larger game. The casino is trying to maximize the overall resort take; the pro is trying to create a marketable brand; the whale is looking for a rush; the dentist is looking for a story to take home. There’s still real money to be won at every table every night, but the meaning of that money and that gameplay isn’t what it used to be back when it was eight off-duty blackjack dealers playing poker for blood night after night. And so it is with dark investment strategies. The meaning of gamma trading has changed over the past decade in exactly the same way that the meaning of Las Vegas poker has changed. And these things never go back to the way they were.

So why does this matter?

For traders managing these derivative strategies (and the multistrats and allocators who hire them), I think this structural evolution in market participant preference functions is a big part of why these strategies aren’t working as well for you as you thought they would. It’s not quite the same classic methodological problem as (over)fitting a model to a historical data set and then inevitably suffering disappointment when you take that model outside of the sample, but it’s close. My intuition (and right now it’s only intuition) is that the changing preference functions and, to a lesser extent, the larger sums at work are confounding the expectations you’d reasonably derive from an econometric analysis of historical data. Every econometric tool in the kit has at its foundation a bedrock assumption: hold preferences constant. Once you weaken that assumption, all of your confidence measures are shot.

For everyone, trader and investor and allocator alike, the explosive growth in both the number and purpose of dark strategy implementations creates the potential for highly crowded trades that most market participants will never see developing, and even those who are immersed in this sort of thing will often miss. The mini-Flash Crash of Monday, August 24th is a great example of this, as the prior Friday saw a record imbalance of put gamma exposure in the S&P 500 versus long gamma exposure. Why did this imbalance exist? I have no idea. It’s not like there’s a fundamental “reason” for creating exposure on one of these invisible threads that you’re going to read about in Barron’s. It’s simply the aggregation of portfolio overlays by the biggest and best institutional investors in the world. But when that imbalance doesn’t get worked off on Friday, and when you have more bad news over the weekend, and when the VIX doesn’t price on Monday morning … you get the earthquake we all felt 6 weeks ago. For about 15 minutes the invisible gamma thread was cut, and everyone who was long gamma did what you always do when you're suddenly adrift. You sell.

I can already hear the response of traditional investors: Somebody should do something about those darn quants. Always breaking windows and making too much noise. Bunch of market hooligans, if you ask me. Fortunately I’m sitting here in my comfortable long-term perspective, and while the quants are annoying in the short-term they really don’t impact me.”

I think this sort of Statler and Waldorf attitude is a mistake for two reasons.

First, you can bet that whenever an earthquake like this happens, especially when it’s triggered by two invisible tectonic plates like put gamma and call gamma and then cascades through arcane geologies like options expiration dates and ETF pricing software, both the media and self-interested parties will begin a mad rush to find someone or something a tad bit more obvious to blame. This has to be presented in soundbite fashion, and there’s no need for a rifle when a shotgun will make more noise and scatters over more potential villains. So you end up getting every investment process that uses a computer – from high frequency trading to risk parity allocations to derivative hedges – all lumped together in one big shotgun blast. Never mind that HFT shops, for which I have no love, kept their machines running and provided liquidity into this mess throughout (and enjoyed their most profitable day in years as a result). Never mind that risk parity allocation strategies are at the complete opposite end of the fast-trading spectrum than HFTs, accounting for a few percent (at most!) of average daily trading in the afflicted securities. No, no … you use computers and math, so you must be part of the problem. This may be entertaining to the Statler and Waldorf crowd and help the CNBC ratings, but it’s the sort of easy prejudice and casual accusation that makes my skin crawl. It’s like saying that “the bankers” caused the Great Recession or that “the [insert political party here]” are evil. Give me a break.

 

Second, there’s absolutely a long-term impact on traditional buy-and-hold strategies from these dark strategies, because they largely determine the shape of the implied volatility curves for major indices, and those curves have never been more influential. Here’s an example of what I’m talking about showing the term structure for S&P 500 volatility prior to the October jobs report (“Last Week”), the following Monday (“Now”), and prior years as marked.

 

Three observations:

a)    The inverted curve of S&P 500 volatility prior to the jobs report is a tremendous signal of a potential reversal, which is exactly what we got on Friday. I don’t care what your investment time horizon is, that’s valuable information. Solid gold.

 

b)    Today’s volatility term structure indicates to me that mega-allocators are slightly less confident in the ability of the Powers That Be to hold things together in the long run than they were in October 2013 or 2014, but not dramatically less confident. The faith in central banks to save the day seems largely undiminished, despite all the Fed dithering and despite the breaking of the China growth story. What’s dramatic is the flatness of the curve the Monday after the jobs report, which suggests a generic expectation of more short-term shocks. Of course, that also provides lots of room (and profits) to sell the front end of the volatility curve and drive the S&P 500 up, which is exactly what’s happened over the past week. Why is this important for long-term investors? Because if you were wondering if the market rally since the October jobs report indicated that anything had changed on a fundamental level, here’s your answer. No. 

 

c)    In exactly the same way that no US Treasury investor or allocator makes any sort of decision without taking a look at the UST term structure, I don’t think any major equity allocator is unaware of this SPX term structure. Yes, it’s something of a self-fulfilling prophecy or a house of mirrors or a feedback loop (choose your own analogy), as it’s these same mega-allocators that are establishing the volatility term structure in the first place, but that doesn’t make its influence any less real. If you’re considering any sort of adjustment to your traditional stock portfolio (and I don’t care how long you say your long-term perspective is … if you’re invested in public markets you’re always thinking about making a change), you should be looking at these volatility term structures, too. At the very least you should understand what these curves mean.

I suppose that’s the big message in this note, that you’re doing yourself a disservice if you don't have a basic working knowledge of what, say, a volatility surface means. I’m not saying that we all have to become volatility traders to survive in the market jungle today, any more than we all have to become game theorists to avoid being the sucker at the Fed’s communication policy table. And if you want to remove yourself as much as possible from the machines, then find a niche in the public markets where dark strategies have little sway. Muni bonds, say, or MLPs. The machines will find you eventually, but for now you’re safe. But if you’re a traditional investor whose sandbox includes big markets like the S&P 500, then you’re only disadvantaging yourself by ignoring this stuff.

 

Ignorance is not bliss, and I say that with great empathy for Cypher’s exhaustion after 9 years on the Matrix battlefield. After all, we’ve now endured more than 9 years on the ZIRP battlefield. Nor am I suggesting that anyone fight the Fed, much less fight the machine intelligences that dominate market structure and its invisible threads. Not only will you lose both fights, but neither is an adversary that deserves “fighting”. At the same time, though, I also think it’s crazy to ignore or blindly trust the Fed and the machine intelligences. The only way I know to maintain that independence of thought, to reject the Cypher that lives in all of us … is to identify the invisible threads that enmesh us, some woven by machines and some by politicians, and start disentangling ourselves. That’s what Epsilon Theory is all about, and I hope you find it useful.

 

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Thu, 10/15/2015 - 14:11 | 6671899 Looney
Looney's picture

After all, we’ve now endured more than 9 years on the ZIRP battlefield

With NIRP we will have to bring a toaster or a Spiderman Towel to the bank to open an account.  ;-)

Looney

Thu, 10/15/2015 - 14:13 | 6671912 o r c k
o r c k's picture

Was that a bank shot ?

Thu, 10/15/2015 - 14:16 | 6671927 Fahque Imuhnutjahb
Fahque Imuhnutjahb's picture

" Bend over Mr. Anderson."

Thu, 10/15/2015 - 14:38 | 6672031 decon
decon's picture

I went to buy a toaster the other day and they tried to give me a bank!

Thu, 10/15/2015 - 15:40 | 6672368 PleasedToMeatYou
PleasedToMeatYou's picture

Ba DUMP bump! 

Thu, 10/15/2015 - 14:44 | 6672067 hedgeless_horseman
hedgeless_horseman's picture

 

 

Bank shots don't count, unless you call Glass-Steagall.

Thu, 10/15/2015 - 17:31 | 6672869 SuperRay
SuperRay's picture

Basically, he's describing an alternate reality that should not even exist because it adds no production value to the economy, yet puts all production at tremendous risk of total failure. The whole financial system needs to be shut down and these financial geniuses need to focus on making things.

Thu, 10/15/2015 - 14:19 | 6671902 hedgeless_horseman
hedgeless_horseman's picture

 

 

The only way I know to maintain that independence of thought, to reject the Cypher that lives in all of us … is to identify the invisible threads that enmesh us, some woven by machines and some by politicians, and start disentangling ourselves.

Disintermediation.

If you absolutely must own equities, and are truly a buy and hold adherent, then buy the shares directly from the company and take possession of the stock certificates.

Thu, 10/15/2015 - 14:29 | 6671987 seek
seek's picture

aka don't be the bagholder or the rehypothecate-ee.

And, in the Matrix spirit, if you really want to bake your noodle, ask youself: is holding a physical US dollar bill in your hand actually disintermediation?

 

Thu, 10/15/2015 - 15:07 | 6672193 Oldwood
Oldwood's picture

I would suggest that the best plan is to pursue actually EARNING an income rather than chasing the something for nothing theme of easy money.

What the hell am I saying????

We live in a god damned casino!

             with a whore house out back.

 

Thu, 10/15/2015 - 16:50 | 6672709 Fahque Imuhnutjahb
Fahque Imuhnutjahb's picture

Liquor in the front and poker in the back.

Thu, 10/15/2015 - 14:19 | 6671931 Sudden Debt
Sudden Debt's picture

I once build a forecast system for sales in a company I once worked for.

At the beginning, I could predict about 5% of all sales.

Then I forced it upon sales where they had to use my system with help from my boss

and a weird thing happened!!

The more they used it, the more it worked! From 5% it went up to 75%!

Why? Because bonuses where linked to that system and the predictions became true in sales forcing my segmentation to other clients.

 

Same thing here. The more you use robo trades, the better they work because they all work with the same type of algo's.

But in the end, the maret turns black or white and the grey goes away.

Flip... Flop.

And there's where it get dangerous.

Thu, 10/15/2015 - 14:21 | 6671942 inosent
inosent's picture

This is interesting, of course, but I have been trading leveraged markets globally since September 1992. I guess that is 23 years if my math is right. While what drives the markets change, the chart structures don't, and the purpose of the markets (my view) to force accts long to cover at a loss at peak lows, or accts long to cover at a loss at peak highs definitely hasn't changed either.

That might not apply so much to stocks (I trade them after the overall market crashes - I haven't done any stock trading since March 2009), but I think it definitely applies to the major commods and bonds, which I trade primarily.

You can pretty much easily tell when there is a high pressure move by some big acct(s) to cannibalize less big acct(s) - and this can be titanic size on either side, btw. Your dinky little $50k acct doesn't even register. The ppl with the small accts just throw their money away, nobody takes it from them. Much larger accts, who are not able to remain invisible, can be sniffed out by a larger acct, or maybe even a few accts that 'gang up' on some other acct long/short and then go on the attack.

This is often completely obvious looking at the price action at particular price and time junctures.

Another eternal axiom is once the losers are forced out, the winners cover and prices reverse.

Am I being generous today, or what :)

 

Thu, 10/15/2015 - 14:31 | 6671996 Spivmeister
Spivmeister's picture

Summs it up in general. You can apply it to stocks, they just have a muppet lag in them.

Thu, 10/15/2015 - 14:39 | 6672040 RopeADope
RopeADope's picture

One reason why you break apart capital into smaller accounts in custody at different institutions. Disguised under different entity names rotating different trading strategies randomly through the accounts whose order flow originates from different IP addresses. Purposefully taking losses so your real alpha is not visible to any spiders crouched on the information web.

There is a world war going on in the machine world and if you do not fight like a guerrilla you will be dead and buried very quickly.

Thu, 10/15/2015 - 15:19 | 6672254 Oldwood
Oldwood's picture

Please explain how participating in the financial markets, making your living from the production of others...and weakness of others, is any different that working for the government, deriving your pay from a system dedicated to the redistribution of wealth from productive labors.

I do not invest.period. other than in myself and my own company.

Yet.... Because those who have chosen to make their living from this so called market, or a generous government job, one they readily admit is corrupt and broken, puts MY life, MY savings, MY assets, MY business at signiifcant risk.

We talk continually how our corrupt government, acting without our consent, has put us in the middle of wars and created hostilities around the world. How they have buried us under infinite debt and endless corruption, while acting like "investing" is as innocent as a newborn.

Makes ME Sick.

Thu, 10/15/2015 - 15:32 | 6672303 inosent
inosent's picture

yep, and I came up with a clever way to 'lose' all my money trading so a potential ex-wife cant get at the money, in the event, God forbid, of a divorce :)

Getting back to your point, which my note above was related to, all day long I watch the bid and offer volume on the major commods, bonds and index futures. I don't see big numbers. It is something, though, that inside all those flashing bids and offers there are whales, and sharks, super-sized hedge funds lurking inside, building or tearing down a huge position, like you say, ultimately aggregating to a single hand but spread out all over the place. I have no idea what it is like to play in their shoes, but I would imagine it is pretty intense, and for some whale to sniff out a shark (people talk - they might be able to fool the exchange, but in this world intel comes from very different sources) who is holding a fat one, only to get overwhelmed by an avalanche of opposing orders that trigger a tsunami of other orders from all over the place, must be pretty exhilirating, knowing you totally killed another acct.

That oil trade from ~$60 or so was a classic. Billions were transferred from weak accts to strong ones. Humilated longs then have been desperately trying to force the bid back down, pounding away, week after week after week, after that wicked stinger from the last sessions of August. Whether or not they can pull it off is hard to say. It doesnt really matter, because with debt levels 5x greater today than they were back when we last saw these prices, yeah, a little squeeze to 35 or something, bfd. With the fiat masters in no mood to contract money supply, where token rate hikes wont really have any effect, surely this is like a launch pad for another inflationary rocket into outerspace. a trade down to $30 is $15k out, but a trade to $150+, you've got a serious problem :)

 

 

Thu, 10/15/2015 - 14:29 | 6671982 buzzsaw99
buzzsaw99's picture

so btfd then?

Thu, 10/15/2015 - 14:30 | 6671990 SheepDog-One
SheepDog-One's picture

Fuck all this, whenever I have some 'investment cash' I'll just buy some more gold, at least it will always be gold in my posession no matter what a machine says.

Thu, 10/15/2015 - 14:31 | 6671997 nakki
nakki's picture

 "as the market goes back and forth, oscillating around that starting point, you are constantly buying the ETF low and selling it high without taking on market risk, pocketing cash all the way along."

Gee what a simple way to make money until you figure in commission, volatility and the ever important "Theta." What happens if the market goes nowhere and your options lose all their premium. 

Options trading isn't that esay, scalping your gamma isn't that easy and don forget about pin risk at expiration.

Thu, 10/15/2015 - 14:37 | 6672023 RockRiver
RockRiver's picture

Options?

What percentage of options expire worthless?

Most all of them.

Thu, 10/15/2015 - 14:34 | 6672011 outlaw.guru
outlaw.guru's picture

If you want to get to the source of unidirection you cannot blame the machines alone. They are only programs after all. The question is who builds them? That's the financial engineers more popularly known as quantative analysts or simply quants. But these men are not magical (probably a few here that could elaborate). Their knowledge is formed in universities and improved on by the banks. So what exactly is thought in universities? Mathematical theories of Scholes and Merton which can be called the fathers of modern mathematical finance. Since their theories came out, the mathematical finance started being an actual science thought to thousands of the best mathematicians. Thousands of quants who have similar knowledge. Hence the effect of their work becomes homogenization of the market strategies. This of course destroys liquidity where it used to exist due to use of hundreds of theories used by investors prior to 1980s.

Thu, 10/15/2015 - 20:30 | 6673478 Livermore Legend
Livermore Legend's picture

".........Since their theories came out, the mathematical finance started being an actual science thought to thousands of the best mathematicians. Thousands of quants who have similar knowledge. Hence the effect of their work becomes homogenization of the market strategies. This of course destroys liquidity....."

Indeed....And Exactly Right.....

Problem is, there is an "Answer" but it is NOT Mathematical........

The "Alchemists" hail down from the Ages taking Different Forms, all trying to create the "GOLD"..........or Currently the "Magic Money Box"......

The "Contemporary Mathematical Alchemists"  as I call them, will end up just as those of Yore.......

There is indeed an "Unsolvable Problem"......

 

 

 

Thu, 10/15/2015 - 14:53 | 6672116 venturen
venturen's picture

One FED to rule them all, one FED to find them,
One FED to bring them all and in the darkness bind them

Thu, 10/15/2015 - 14:54 | 6672121 RaceToTheBottom
RaceToTheBottom's picture

What this guy doesn't believe that the "“the bankers” caused the Great Recession "?

How did he get through to post here?

Thu, 10/15/2015 - 15:06 | 6672144 sunkeye
sunkeye's picture

Ha. I remember watching a local Chicago UHF (or was it VHF?) tv channel that talked stocks & commodoties during market hours Mon-Fri. You get the picture - a talking head reading news & business headlines top & bottom of the hour, then for the rest of the 30 mnutes, some entity's - bank, broker, or some other financial related company - representative would be interviewd. 

 

Other times tho, an independent trader would buy air-time and sit in the interview-ee's chair.  One dude I remember was an options market-maker.  He ALWAYS looked completely bedraggled - wrinkled open collar shirt w/ tie knot pulled loose and sleeves rolled up.

 

I was taking a business major elective on options pricing and SUPER sharged about making my million QUICK buying out of the money puts (Ha perma bear mentality mine.) But watching this dude look SO weary and not just tired but exhasted as in mentally & phyicallly spent, didn't look all that fun. But hey, that was him, not me.

Cable came to town and the "antenna tv" station faded way (I assume so anyway.)  I lost my ass trading the E-mini but boy before I did, did I learn first-hand how/why that dude looked the way he did.

 

Thu, 10/15/2015 - 18:11 | 6673027 August
August's picture

Everyone who "invests" or "trades" should lose a few million, win a few million.

Then, all the wiser, they should just grow up and do what they love.

Maybe go on financial talk shows... or keep bees.

Thu, 10/15/2015 - 15:02 | 6672163 cougar_w
cougar_w's picture

That there is an illusion is itself an illusion. There is no safe place inside or outside the illusion because there is no place.

All you can do now is run away, not looking back. Run as far as you can not looking back.

Thu, 10/15/2015 - 15:08 | 6672194 Shrike99
Shrike99's picture

This is one of the best articles I've read here in a long time.

Thu, 10/15/2015 - 15:21 | 6672268 Okienomics
Okienomics's picture

With each passing day, week, month, quarter, year, I am growing more and more comfortable with the strategy of investing in companies which produce actual things at a reasonable profit and return a signficant portion of that profit to shareholders in the form of a dividend which does not exceed earnings.  

Thu, 10/15/2015 - 15:29 | 6672302 gaoptimize
gaoptimize's picture

When I go to Las Vegas, I enjoy the food, entertainment, and fantasy architecture, but never gamble.

After zerohedge explained to me HFT front-running quite a few years ago now, I do not trade.  I buy stock one or two times a year, and sell no more than once.  And to Charles Schwab's credit, they have always excuted these transactions extremely quickly and not to my disadvantage.

Thu, 10/15/2015 - 15:35 | 6672330 Okienomics
Okienomics's picture

But don't you know they probably skim $0.0003573328/share when you do those two trades?

Doesn't it bother you that your contribution to "the machine" equates to 98 cents and that if they replicate it millions of times they make millions of dollars from it?

Aren't you ready to RIOT because of all this ill gotten gain?

Oh, yeah, me neither.  I play the same strategy at Las Vegas.  We're just old fuddy duddies.

Thu, 10/15/2015 - 17:54 | 6672954 Wave-Tech
Wave-Tech's picture

I get the intense desire for quants to in essence “scalp” markets to stay above water regardless of the very basic arithmetic associated with underlying economic fundamentals – but for the life of me, I see no enduring value or contribution such activity provides to civil society beyond shuffling paper profits to-and-fro amongst the machines and those within the small group of financial elite who have built and now manage them.

Do NOT follow this link or you will be banned from the site!